Rajan and Zingales (2003) hypothesize that openness—trade and financial—is a crucial determinant of financial development. The main policy implication emerging from this hypothesis is that openness should be promoted as a means of facilitating economic growth through financial development. While subsequent research confirms that openness affects financial development, we study whether finance continues to be growth promoting as economies become increasingly open—a key implicit assumption behind the policy recommendation. Using data from 78 economies for the period 1981–2006, we find that very high levels of financial openness generally erode the growth-promoting role of financial development while high trade openness strengthens it. These worldwide findings by and large hold for subsamples of Sub-Saharan African, Latin American and OECD economies. Notable exceptions are the invariance of the finance-growth (FG) nexus on trade openness in OECD economies and the positive effect of financial openness on the FG link in Latin American economies.

This paper examines how firm specific and macroeconomic announcements affect transaction rates in U.S. airline stocks. Using a version of the autoregressive conditional hazard framework of Hamilton and Jordà (2002) that incorporates market microstructure variables, we show that on average, trading intensity spikes prior and consequent to macroeconomic announcements, but decreases around firm-specific releases. Further, when we use intraday crude oil futures returns as a proxy for industry relevant and globally important news we find that their effects are statistically significant, with higher oil futures returns increasing the probability of trade.

We provide estimates of holdings of highly rated securitization tranches of U.S. bank holding companies before the credit crisis and evaluate hypotheses that have been advanced to explain them. Whereas holdings exceeded Tier 1 capital for some large banks, they were economically trivial for the typical bank. Banks with high holdings were not riskier before the crisis using conventional measures, but they performed poorly during the crisis. We find that holdings of highly rated tranches were correlated with a bank’s securitization activity. Theories unrelated to the securitization activity, such as “bad incentives ” or “bad risk management, ” are not supported in the data. (JEL G01, G21) Holdings of highly rated tranches of securitizations held by U.S. banks were at the heart of the financial crisis of 2007–2008. At least in the early phases of the crisis, the bulk of the assets that were considered to have become toxic by many observers were these securities with subprime and alt-A mortgage collateral. Losses in value led banks to have low capital and forced them to raise more capital, cut back on new loans, and engage in fire sales (see Brunnermeier 2009). The most visible and controversial policy initiative of the U.S. Treasury

We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other times, it is negative. These results are consistent with dynamic trade-off models in which infrequent capital structure rebalancing is optimal. The time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models. Our results are not driven by investment layouts, market timing, payout, or mechanical mean reversion of leverage.

Our paper examines three related questions: Will directors who have friendship ties with the CEO manage earnings to benefit the CEO in the short term while potentially sacrificing the welfare of the company in the long term? Will public disclosure of friendship ties mitigate or exacerbate such behavior, and will disclosure of friendship ties influence investors' perceptions of director decisions? We conduct an experiment involving 56 active and experienced corporate directors from U.S. firms and a second experiment with M.B.A. students. We find that friendship ties caused directors to be more willing to approve reductions to research and development (R&D) expenses that cause earnings to rise enough to meet the CEO's minimum bonus target more often than when the directors and CEO were not friends. However, disclosing friendship ties resulted in even greater reductions in R&D expenses and higher CEO bonuses than not disclosing friendship ties. In a second experiment, we find that shareholders were more likely to agree with directors' decisions to approve cuts to R&D when friendship ties were disclosed. These findings have potentially important implications for corporate governance because they suggest that friendship ties between the CEO and board members can impair the directors' independence and objectivity, and that disclosure of the relationships can worsen this effect.

Using transactions generally overlooked in the compensation literature—joint ventures, strategic alliances, seasoned equity offerings (SEOs), and spin-offs—we find that, beyond compensation for increases in firm size or complexity, chief executive officers (CEOs) are rewarded for their deal-making activities. Boards pay CEOs for the core motivation of the deal, as well as for deal volume. We find that compensating for volume instead of core value creation occurs under weak board monitoring and that in deal-making firms, neither CEO turnover nor pay-for-performance responds to underperformance. We introduce an input monitoring explanation for these results: boards compensate for deal volume because of their inability to perfectly monitor outputs.

In Mexico, as in most Latin American countries with indigenous populations, it is commonly believed that European phenotypes are preferred to mestizo or indigenous phenotypes. However, it is hard to test for such racial biases in the labor market using official statistics since race can only be inferred from native language. The experiment consisted on sending fictitious curriculums responding to job advertisements with randomized information of the applicants. The resumes included photographs representing three distinct phenotypes: Caucasian, mestizo, and indigenous. We find that indigenous looking females are discriminated against, but the effect is not present for males.

State-controlled listed firms in China receive preferential treatment when borrowing from commercial banks; in contrast, private controlled firms rely on informal finance and on trade credit. We argue for and find evidence that private firms located in higher social trust regions use more trade credit from suppliers, extend more trade credit to customers, and collect receivables and pay payables more quickly. These findings are enhanced for firms located in provinces with weak protection of property rights. Our results are robust to different measures of social trust, legal environment, and endogeneity. Overall, our results show that social trust helps private firms overcome institutional difficulties in financing their activities.

A broad stream of research shows that information flows into underlying stock prices through the options market. For instance, prior research shows that both the Put–Call Ratio (P/C) and the Option-to-Stock Volume Ratio (O/S) predict negative future stock returns. In this paper, we compare the level of information contained in these two commonly used option volume ratios. First, we find that P/C ratios contain more predictability about future stock returns at the daily level than O/S ratios. Second, in contrast to our first set of results, O/S ratios contain more predictability about future returns at the weekly and monthly levels than P/C ratios. In fact, our tests show that while P/C ratios contain predictability about future daily returns and, to some extent, future weekly returns, the return predictability in P/C ratios is fleeting. O/S ratios, on the other hand, significantly predict negative returns at all levels: daily, weekly, and monthly. While Pan and Poteshman (2006) show that signed P/C ratios, which require proprietary data, have predictive power, we find that unsigned P/C ratios, which do not require proprietary data, also have predictive power.

We study a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting. A panel analysis across 29 countries and over 43,000 firm-years demonstrates that our model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically. Our paper seems to be the first that highlights empirically in a straightforward way the relevance of behavioral patterns as important determinants for corporate dividend policy, while previous empirical studies could tackle this issue only indirectly. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.